Investment Company Act of 1940 investment & finance definition

A landmark law passed in 1940 that established the laws and regulations for the mutual fund industry. Its purpose is to ensure that investors receive adequate and accurate information about mutual funds. The law regulates what type of investments that mutual funds may make and attempts to ensure that investors’ money will be protected and not subjected to too much risk. The law outlines what information mutual funds must disclose to investors about the fund’s fees and expenses, share holdings, management, and financial performance. The law applies stringent financial requirements on funds; for example, it severely restricts a fund’s ability to borrow against the securities in its portfolio. Funds also are required to own the underlying securities if they purchase futures, options, forward contracts, or do short selling (selling stocks or futures that they don’t own).